Government bids to halt long-distance merger

Published: Wednesday, June 28, 2000

WASHINGTON (AP) - The Justice Department on Tuesday sued to stop the merger of the nation's second- and third-largest long-distance phone companies, saying the proposed $129 billion union of Worldcom Inc. and Sprint Corp. would leave millions of Americans paying more for less.

The companies almost immediately withdrew a merger notification filed with the European Commission but insisted the proposal was still viable in the United States.

Company officials said they would take ''a couple of days'' to assess their options before deciding whether to try to win a decision in federal court or withdraw the merger proposal in the United States as well.

Just a day before, the European Union's antitrust chief, Mario Monti, said the companies had offered a ''less than satisfactory'' response to concerns of overseas regulators that their pairing would dominate high-level Internet access around the world.

Attorney General Janet Reno, in announcing the lawsuit, said the merger threatens to undermine gains achieved by the breakup of AT&T into ''baby bells'' 25 years ago.

''Going from the Big Three telecom companies WorldCom, Sprint and AT&T to the Big Two would be like giving customers the wrong number,'' Reno said. ''We must continue to go forward toward greater competition, better innovation, not backward, toward the telecom monopoly of yesterday.''

The lawsuit, filed in U.S. District Court in Washington, seeks a permanent injunction to prohibit the merger.

Sprint General Counsel J. Richard Devlin said he believes Sprint had ''presented an overwhelming case in support of the merger.'' Until now, the companies' strategy was that the Europeans might go along if they could convince U.S. regulators of the merger's benefits, Devlin said.

''Sprint hopes that a sensible conclusion to this merger can be reached,'' he said.

''The public benefits are too great to pass up.''

Shortly before Reno's announcement, Michael Salsbury, WorldCom general counsel, said in a written statement: ''WorldCom will promptly review its options with Sprint.''

It was already clear that the proposal would be rejected by the Europeans, possibly as early as today. So instead, the companies pre-empted them by withdrawing.

''If, in the future, the parties decide to proceed with the merger (in Europe), they will make such notifications as are appropriate under European merger laws,'' the companies said in a joint statement.

The government said this was the largest merger challenged by Justice.

Joel I. Klein, assistant attorney general of the department's antitrust division, said the lawsuit came after a nine-month investigation and negotiations with the parties.

He said changes offered by the companies were not sufficient to maintain competition in the industry. Although Klein would not identify those changes, European Commission officials said the companies offered to sell Sprint's long-distance services and Internet backbone.

Devlin said the government also wanted the companies to offer up Sprint's local telephone service, leaving the new entity with just a tiny portion of Sprint's assets.

''Basically, at that point, it didn't make any sense to continue discussions because that alternative was unacceptable,'' Devlin said.

Klein said the merger would harm ''virtually every American consumer'' by ending the aggressive competition between the two companies for customers: ''Just watch television. Just get home and hear people calling you on the phone trying to switch you from Sprint to WorldCom or from WorldCom to Sprint,'' said Klein.

Klein said the impending European decision had little to do with the U.S. announcement. ''Our analysis of this case was based upon its impact on U.S. consumers and U.S. businesses,'' he said.

In residential long-distance telephone markets and several other markets, WorldCom and Sprint are the only substantial competitors to AT&T and to each other, the government said. Each has constructed national and international fiber optic networks and developed sophisticated systems for handling millions of customer accounts.

In some areas, the department said, the combined companies' long distance and Internet service could reach as much as 60 percent of the market.

The Justice Department said the proposed WorldCom-Sprint merger would reduce competition in the following U.S. markets:

Long-distance service to residential customers. WorldCom has 19 percent of residential telephone lines; Sprint about 8 percent. Combined with AT&T, those three have 80 percent.

Internet backbone service, the hardware that connects Internet service providers with Internet users. WorldCom operates the largest internet backbone, with 37 percent of all Internet traffic. Sprint has the second-largest backbone, with 16 percent of the traffic.

International long-distance between the United States and more than 50 foreign countries. In each of these markets, the combined WorldCom and Sprint shares are at least 30 percent. Combined with AT&T, the top three have at least 80 percent of these markets.

International private lines between the United States and more than 60 foreign countries. In this market for dedicated lines used exclusively by a particular customer, the combined WorldCom and Sprint shares in each market are at least 37 percent, and, combined with AT&T, the top three have at least 82 percent.

Data network services to large business customers in the United States.